Consumers, Ill. officials react to US credit downgrade

August 6, 2011 8:29:12 PM PDT
Top officials of Standard and Poor's are defending their decision to downgrade the U.S. government's credit rating, following the Obama administration claims that it was a hasty decision based on faulty math.

The rating is an unprecedented reversal of fortune for the world's largest economy. While the average investor and consumer tries to figure out what the demotion means for them, Illinois lawmakers are reacting as well.

What does the downgrade mean for the state of Illinois and for you, the consumer?

Conventional wisdom says interest rates are sure to go up, perhaps within a matter of weeks. But how high they might rise and what effect that will have on the economy remains unclear.

At Kingdom Chevrolet on Chicago's Southwest Side, the potential for rising interest rates had shopper Dameron Cribbs shopping more seriously Saturday.

"I think I'd definitely go out and get it while the interest rate is low because you may not know the next time it's going to get low again," Cribbs said.

Managers at the car dealership say they are worried the U.S. credit downgrade could make it harder for customers to get financing.

"A lot of stores, ours included, dropped our prices pretty quickly in hopes to lower inventory, in the event that we suddenly have a credit freeze," said Kingdom Chevrolet's Doug Tincu.

But it's not just auto loans that could be affected. Although it's too early to know, economics Professor Bill Kresse says student loan rates could go up as much as three-quarters of a percent, mortgage rates a full point and credit card rates even higher.

"Then, you're going to see a lowering of consumer spending, and consumer spending in the United States is what drives our economy. If that gets lowered, we would not expect companies to start hiring more," Kresse said.

In issuing the downgrade, S&P pointed to "the gulf" between the United States' political parties which used the debt ceiling as a "bargaining chip," leaving the U.S. "less stable, less effective."

"This is not really a serious way to run the country," said the company's John Chambers.

While some Republican lawmakers reacted to the Friday decision saying the move supports the need for Congress to make more spending and borrowing cuts, Democrats like U.S. Congressman Danny Davis says the political gamesmanship must end.

"We give tax breaks to the very super rich and where are we? What happens?"said Rep Davis, seventh congressional district.

Already-rattled global investors will be watching nervously Sunday when Asian markets open.

"Over the long term, I do think we're going to be fine, and so I would not encourage any investor to make any rash moves on this news," said Ariel Investments' Mellody Hobson.

For now, the other two major ratings agencies still consider U.S. credit AAA, but if one or both also downgrade, the effects could spiral down to the state level.

"If we don't watch what we're doing, and it has a ripple effect from the U.S. government to us, our bond rating could go down. It will cost us more, and it will mean less I can earn in interest for the public of Illinois on the portfolio," said State Treasurer Dan Rutherford.

Rutherford calls the downgrading of the United States' credit rating a wake-up call.

The impact of the Standard and Poor's credit rating downgrading may be tempered by a decision from Moody's Investors Service to keep America's rating at AAA. Fitch Ratings is still reviewing the rating and will issue its own opinion by the end of the month.

Some financial experts say a downgrade does not always spell economic peril. They say both Japan and Canada emerged stronger about a year after being downgraded. But, it's hard to see the upside with the economy as fragile as it is.

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